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A Financial Derivatives Company Publication
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FDC Bi-Monthly Update March 15, 2018
Volume 8, Issue 6
2
In This Issue …
Global Perspective: New Research Suggests the Dollar’s Level Drives World Trade - Culled from The Economist
Macroeconomic Indicators
Commodities Market
06
09
12
14
18
21 Stock Market Review
24 Corporate Focus: PZ Cussons Plc
Containing Domestic Fuel Scarcity Via Higher Profit Margins
The UK’s Local Credit Finance Scheme
03 Increase in Excise Duty on Tobacco and Alcoholic Beverages
3
Increase in Excise Duty on Tobacco
and Alcoholic Beverages
T he federal government recently approved an increase in excise
duty on tobacco and alcoholic beverages, to bolster its revenue.
This has the added benefit of reducing the health hazards associated with the
consumption of tobacco and alcohol. The new excise duty, which takes effect
from June 4, 2018, will be implemented over a 3-year period to reduce the im-
pact on manufacturers and the fallout on inflation.
From a policy perspective, the newly approved tariffs will boost Nigeria’s tax to
GDP ratio, currently at 6%, and reduce the fiscal deficit (2.5% of GDP). This
could also help reduce the level of substance abuse. In addition, as a specific
tax which replaces the ad valorem tax on alcohol consumption, the discretion
of custom officers to divert taxes will be curtailed. However the tax on tobacco
will be a combination of the existing ad valorem rate of 20% and the new spe-
cific rate.
Incidence of Tax- Higher on the Poor
From a consumer perspective, the incidence of tax is
higher on the poor. This is because it is inflationary, re-
duces consumer disposable income and distorts the allo-
cation of resources. Besides, imposing higher taxes could
encourage smuggling activities, as well as tax evasion.
Manufacturers oppose the increase and the timing, as
most are just recovering from a negative profitability and
revenue contraction. Ideally, a counter cyclical policy
direction that would ensure injections into the system
would have been more appropriate. However taxes are
withdrawals and the increase in excise duty is likely to
reduce margins and could prompt higher unemploy-
ment.
4
Tax burden falls on Consumers
This sin tax, which cuts across the total beverage and al-
cohol sector, will likely be passed on to consumers. The
effective increase in the price of spirits will range from
12% to 20% over current prices, while malt, beer and stout
will increase by 6% to 10%. The industry is battling with de-
clining volumes and contracting margins. Hence, the im-
pact of absorbing the cost of the tax might be over-
whelming on current players in the industry.
To improve operational efficiency, brewers may adopt
aggressive cost optimization measures, such as layoffs or
even delay impending expansion plans. This will reverse
some of the growth recorded by the food, beverage and
tobacco sub-sector. In 2017, the sector improved by
8.62% over 2016, recording a growth of 2.35% and outper-
forming GDP growth.
Apart from the implications earlier mentioned, this move
by the government will encourage the patronage of the
informal tobacco and alcohol producers. Operations of
this unregulated industry are poised to be more detri-
mental to health and have been known to incite public
nuisance and abuse.
Impact on Brewing Companies
The leading brewers and distillers such as Nigerian Breweries, Guinness Nigeria and International Breweries will be the
biggest losers, as most have embarked on aggressive expansion plans in anticipation of a pickup in demand. This
would intensify competitive rivalry among the players and further erode margins. However, given that the tax im-
posed on alcoholic beverages is a regressive tax, as opposed to the previous ad valorem regime, value brands such
as Trophy and Hero will be hit the most, due to their lower price. Either way, the industry is likely to face a most chal-
lenging period in the next three to four quarters.
5
6
G lobal oil prices have surged in the current year to $70 per barrel
(pb), largely due to the combination of rising demand and the out-
put-cut led by the Organization of the Petroleum Exporting Countries (OPEC)
and its allies. Given Nigeria’s endowment in oil, this bullish trend in oil prices
should translate to a stronger macroeconomic performance. However, it pre-
sents a conundrum to policy makers in Nigeria, largely due to the fact that the
country imports a majority of its refined petroleum products. This has placed the
nation’s economy in a precarious position whereby it oscillates between peri-
ods of acute fuel shortage and steady supply.
Containing
domestic fuel scarcity
via higher
profit margins
7
In December 2017, the
Nigerian economy saw
a re-emergence of fuel
queues after 18 months
of steady supply. Petro-
leum authorities have
accused petroleum
marketers of hoarding
to create artificial scar-
city and incentives to
divert products to the
black market. Fuel mar-
keters say that scarcity
is a result of a reduction
in the importation of
refined petroleum
products due to declin-
ing profit margins.
Clearly, macroeco-
nomic variables have
changed, since the
pump price cap was
set at N145 per liter in
April 2016. For example,
the average price of oil
(Brent) has risen by
59.77% to an average
of $68.99pb in January
2018, from an average
of $43.18pb in April
2016. Similarly, the aver-
age official exchange
rate has depreciated
by 53.9% to N305.78/$
from an average of
N198.69/$ in April 2016.
These changes in mac-
roeconomic funda-
mentals have ultimately
led to higher costs of
importation (landing
costs). Given the exist-
ing cap in pump price,
this has greatly re-
duced profitability.
Hence, independent oil
marketers are reluctant
to import. In an effort to
ease the lingering fuel
scarcity, the federal
government has di-
rected the Nigeria Na-
tional Petroleum Corpo-
ration (NNPC) to in-
crease its fuel import.
The NNPC claims to
have spent $5.8bn on
fuel importation in
Q4’17. However, fuel
scarcity persisted partly
due to the existence of
arbitrage opportunities.
For example, the naira
equivalent of petrol
pump price in the
neighboring Benin Re-
public and Ghana is
N225 per litre and N350
per litre respectively.
The disparity in price
has encouraged cross
border smuggling of
petroleum products
and highlights the fun-
damental problem in
the existing pricing
mechanism in Nigeria.
Changes in prevailing macroeconomic fundamentals
To address this recurring problem,
the federal government could
either employ a short term or a
long term approach. For exam-
ple, the federal government
could grant a temporary tax holi-
day as an incentive for inde-
pendent fuel marketers. This
could potentially lower the
weighted average cost (landing
cost) of petroleum imports and
thus raise profit margins in the
near term. Similarly, the subsidy
system could also be employed
in light of the political risk associ-
ated with increasing pump price
at this period. The proposed sub-
sidy could be in terms of lower
exchange rates for fuel marketers
or a direct subsidy payment sys-
tem. The downside of a direct
payment is the effect on govern-
ment revenue, ultimately widen-
ing the fiscal deficit.
A long-term approach is to con-
struct new refineries, pass the pe-
troleum industry bill and effec-
tively deregulate the down-
stream oil and gas sector by re-
moving the price cap. The sole
responsibility of the government is
to create an enabling environ-
ment for market forces to thrive.
The government can attain this
by establishing a pricing frame-
work that factors in the effects of
changes in the exchange rate
and global price of oil and in-
creasing domestic refining ca-
pacity by constructing new refin-
eries.
Means to an end
8
A typical example of
such a pricing mecha-
nism is the one used in
the United Kingdom. In
the UK, four major varia-
bles determine the
pump price of fuel: gov-
ernment duty and tax;
cost of product (crude)
in the international mar-
ket; retail spread; and, to
a lesser extent, the ex-
change rate. The ex-
change rate has a sub-
tle weighting due to the
adequacy of the UK’s
domestic refining ca-
pacity; the country does
not have to import re-
fined petroleum prod-
ucts. Nigeria can draw
inference from this, in
order to establish a dy-
namic pump pricing sys-
tem. Given Nigerian’s
current dependence on
the importation of re-
fined product, the Nige-
rian mechanism needs
to put a higher
weighting on exchange
rate and crude cost.
With this system in place,
market factors will come
into play in pump price.
For example, a depreci-
ating exchange rate will
result in a relatively high-
er pump price, to help
mitigate the foreign ex-
change loss, while a
stronger currency will
translate to lower pump
prices.
However, it is unlikely that
the current government
will institute such a major
reform in the build up to
the 2019 general election
as it will be considered po-
litically risky. Similarly, re-
verting to the subsidy sys-
tem could mean a return
to the abuses that marred
the system before its aboli-
tion -another risky proposi-
tion. In the meantime, the
NNPC will continue to bear
the burden of higher land-
ing costs which will weigh
on its finances. This remains
a questionable use of
scarce resources for the
cash-strapped govern-
ment and is likely to con-
tinue to lead to disruptions
in fuel supplies in the coun-
try
However, it is unlikely that the current government will institute such a major reform in the build up to the 2019 general election as
it will be considered politically risky.
9
1A customs union is an agreement that allows free trade between two entities
The UK’s local credit finance scheme
Introduction
The United Kingdom Export Finance (UKEF) will provide up to £750m ($1.04bn) in credit financing for Nigerian business-
es to purchase goods from the UK.
Under the initiative:
Importers will be able to settle transactions in naira;
Importers must secure loans from a recognized local financial
institution;
The UKEF will act as a guarantor for importers;
Only transactions worth a minimum of £5mn ($7mn) are eligi-
ble; and
The importer must source at least 15% of the contract value
elsewhere
Why now?
Today, the European Union (EU) accounts for up to 50% of the UK’s trade. As a member of the EU, the UK is eligible
for tariff-free trade, and free movement of its exports. This will be reversed once the it exits the European bloc. Tariffs
will make exports more expensive, thus less competitive. Britain will also lose some of its negotiation power with non-
EU countries. Although there is a lobby for a partial customs union1 with the EU, the UK is also looking to secure new
trading deals to wade the post Brexit tide- this is where the developing world comes in. This credit financing scheme
is also available to over 25 other developing countries, including Sub-Saharan African countries Botswana, Kenya,
Mauritius, Nigeria, South Africa and Uganda.
10
2Armstrong, Dr. David & Dr.Andrew S Nevin; March 2016; “Seizing the Opportunity: An economic assessment of key sectors of opportunity for UK busi-nesses in Nigeria”; Foreign & Commonwealth Office, PWC; Available at <https://www.pwc.com/ng/en/assets/pdf/uk-trade-investment-in-nigeria.pdf> 3Research team, September 7, 2016; “Nigeria’s Top Trade Partners (Countries of Imports and Exports); Nairametrics; https://nairametrics.com/nigerias-top-trade-partners/ 4Ibid. Armstrong, Dr. David & Dr.Andrew S Nevin;
Why Nigeria?
Nigeria is a significant player in UK
foreign relations. In the early 2000s,
the UK was Nigeria’s largest trading
partner, partly due to its colonial
and historic ties with the country.2
Today, however, the country has
been knocked from the top spot by
the Asian giants (China, India), and
the US.
The UK is the fifth largest source of
imports into Nigeria3, with main im-
ports being machinery (e.g. power
generators), and branded products
such as luxury vehicles (Land Rover,
Jaguar) and pharmaceutical prod-
ucts (GSK, May and Baker).
On the export side, the UK is the sixth
biggest destination for Nigerian
products. Major exports include rub-
ber, cocoa, and crude oil.
Nigeria also receives significant aid
from the British Government and UK-
based multinationals towards the
achievement of the Sustainable De-
velopment Goals (SDGs).
The UK is a hotspot for emigration
out of the country, hosting the sec-
ond largest Nigerian Diaspora in the
world. It is no wonder that Diaspora
remittances from United Kingdom
alone reached $20.8bn, equivalent
to 94.5% of total remittances into
Nigeria. Additionally, approximately
18,000 Nigerian students come to
the UK each year. This is the third
largest origin of international stu-
dents after China and India.4
What will be the impact?
The concept of loans denominated
in local currency is not a new one. It
is a common strategy employed by
multilateral organizations, develop-
ment banks, and governments to
assist developing countries. The initi-
ative could also encourage other
trading partners to introduce similar
programs.
The scheme is positive for Nigerian
importers, especially those whose
costs are in foreign currency, but
their earnings are not. With this
scheme, enterprises can borrow in
naira, and repay in naira, avoiding
foreign exchange risks and variable
debt costs. However, the floor of
£4.75 million (85% of transaction val-
ue, approx N2.37bn) for loans ex-
cludes Small to Medium Enterprises
(SMEs) from participating in the
scheme.
It is unlikely that this scheme could
lead to an appreciation in the naira.
This is because it merely shifts forex
demand from importers to the Fed-
eral Government; there is no actual
reduction in the demand for forex.
The U.K., however, is the one who
stands to benefit the most, as this
scheme creates incentives for im-
porters to shift trade to the UK. Thus,
it will support demand for British
goods and services and boost ex-
ports.
In conclusion, the new initiative is
positive for the UK, who gets the bet-
ter half of the bargain. Yet, there are
pros for the Nigerian economy such
as mitigated currency risks.
11
12
A stronger greenback crimps trade outside America
AGUS SACCHAL sells sheets and blankets from a warehouse in Buenos Aires, for
which he is paid in Argentine pesos. While the pesos go into his wallet, two other
banknotes are stuck to his office window. One is a ten-yuan note from a visit to
China, where he went in search of cheap textiles. The other is a $5 bill, pinned next
to an invoice, also in dollars. Though he does not trade with America directly,
when importing he uses the greenback.
Argentina’s rocky financial history makes the dollar’s dominance there unsurpris-
ing. Still, it is an extreme case of a wider phenomenon. After gathering data on
91% of the world’s imports, by value, Gita Gopinath of Harvard University found
that America accounts for nearly 10%. But its currency is used in over 40% of invoic-
ing.
Recent research suggests that this creates a link between a weak dollar and buoy-
ant trade flows—and vice versa. Trends since 1999 are suggestive (see chart).
New research suggests the
dollar’s level drives world
trade
Global Perspective: Culled from The Economist
13
During 2017 the dollar depreciat-
ed by 7% against a basket of
other currencies, as global trade
flows surged by 4.5%. Some oth-
er factors could be driving both.
But a recent paper by Ms Go-
pinath, Emine Boz of the IMF and
Mikkel Plagborg-Møller of Prince-
ton University found that, even
after adjusting for countries’
business cycles, a 1% dollar
strengthening predicted a fall in
trade volumes outside America
of 0.6%.
They explain the connection by
upending the standard way of
thinking about the impact of
exchange rates on trade. Text-
book models tend to assume
that importers face prices in the
exporting country’s currency,
which are hard to renegotiate.
During 2017 the dollar
depreciated by 7%
against a basket of
other currencies, as
global trade flows
surged by 4.5%.
Some other factors
could be driving
both.
An importer whose cur-
rency falls against the
exporter’s is squeezed.
But his countrymen who
export in the opposite
direction get a fillip, as
their wares become
more competitive. In this
neat and symmetric
world, as a country’s
imports fall because of a
weaker currency, its ex-
ports rise.
But what of importers
like Mr Sacchal, who
buy in dollars? The re-
searchers argue that
here, the symmetry
breaks down. A stronger
dollar squashes his de-
mand for Chinese prod-
ucts, without Argentine
exporters to China gain-
ing a countervailing
bump. A strong dollar
would then mean that
trade volumes outside
America fall.
Supporting their theory,
they find that dollar ex-
change rates seem to
be more useful than
those of other curren-
cies when predicting
changes in trade flows
and prices. This is partic-
ularly so in places that
invoice a higher share of
imports in dollars.
Alternatively, as suggest-
ed in a recent working
paper published by the
Bank for International
Settlements, a strong
dollar could tighten
global credit conditions,
making it harder to fi-
nance long supply
chains and so crimping
trade flows. The authors
find that a strong dollar
is associated with slower
-growing company in-
ventories (shorter supply
chains require less stock
to be held along the
way).
Given the dollar’s re-
cent weakness, what
does all this suggest
about future trade
flows? The recent trade
surge might be only
temporary, if traders re-
negotiate dollar prices.
The results of Ms Go-
pinath and her co-
authors suggest other-
wise. They find that,
since 2002, the effects of
dollar movements on
trade have persisted.
Gabriel Sterne of Oxford
Economics, a consultan-
cy, reckons that about
half of the increase in
trade flows due to the
weak dollar since 2017 is
yet to come.
14
Macroeconomic Indicators
Purchasing Managers Index (PMI)
The FBN PMI reading in February expanded
marginally to 54.7 points from 54.6 points in
January. The FBN PMI reported that two of
the five variables (output and employment)
improved in February. The expansion was
driven by the CBN’s forex policy.
CBN manufacturing PMI reading for Febru-
ary contracted to 56.3 points from 57.3
points in the preceding month. The CBN
report indicated that supplier delivery time,
employment level and inventory levels grew at a faster pace while production level and new orders grew
at slower paces in the review period. In the 15 subsectors surveyed, 10 reported growths while the printing &
related support activities, cement, non-metallic mineral products, fabricated metal products and transpor-
tation equipment subsectors contracted in the review month.
Outlook
We expect an expansion in the manufacturing sector as well as in the economic activities in March. As
manufacturers increase output and replenish old stock for Easter, these factors will have an impact on
inventory levels.
Power Sector
Total average power output in February was
3,937.14MWh/h, 6.75% higher than the average power
output of 3,688.16MWh/h in January. Despite this im-
provement, the sector lost N35.52bn annualized at
N12.89trn during the month. This was predominantly due
to gas constraints in power stations. Average power
dipped to a month low of 3,032.24MWh/h on February
1st, as a result of a gas constraint of 650MWh/h at Afam
VI power plant. Average on grid power output however
recorded to reach a peak of 4,277.49MWh/h on Febru-
ary 15th due to increased output at Egbin and Delta
power plants.
FA
CT
S &
FIG
UR
ES
5
6
5Source: FBN, CBN, FDC Think Tank 6Source: Nigerian Electricity Supply Industry
15
7Source: CBN, FMDQOTC, FDC Think Tank
Money Market
Average liquidity in February was
N173.78bn long relative to the average
opening position in January of
N283.15bn long.
Short-term Open Buy Back (OBB) and
Over Night (O/N) rates averaged 19.13%
per annum (pa) in February, which was
868bps higher compared to 10.45% pa
recorded in January. The OBB started at
3.83% pa and the O/N rates at 4.67% pa
before closing at 3.75% pa and 4.50% pa
respectively. This was due to the dis-
bursements of FAAC inflows of
N635.55bn and Open Market Operations
(OMO) bill maturities. On February 7th,
the OBB rate was as high as 53.00% pa with the O/N rate at 53.08% pa. This was due to reduced liquidity in the
system driven by wholesale and retail forex sales. At the primary market auction, T/bill yields decreased further
to close the month at 11.85%, 13.50% and 13.50% from the first auction’s stop rates of 11.95%, 13.65% and
13.70% for the 91-day, 182-day and 364-day respectively on February 14th.
At the secondary market, the yields on 91-day and 182-day T/bills increased to 14.05% and 14.42% on Febru-
ary 28th, compared to 13.18% and 13.42% as at January 31st while the 364-day T/bills decreased to 13.43%
from 13.65% on January 31st.
Outlook
Interest rate movements are a function of market liquidity. However, the likely sources of inflows that
could boost naira liquidity in the coming month are higher monthly statutory allocations and capex
disbursements. The CBN’s primary objective remains price stability and the apex bank will continue to
regulate liquidity levels in the money market. We expect to see an increase in market liquidity which will
be driven by capex disbursement.
Outlook
Hydro power generation is expected to improve as the raining season approaches. However, gas
constraint will remain a challenge. In addition, the bottlenecks in transmission and distribution will pose
as risks to the level of power generated.
FA
CT
S &
FIG
UR
ES
7
16
8 Source: FDC Think Tank 9 Source: CBN, FDC Think Tank
External Reserves
The level of Nigeria‘s gross external reserves contin-
ued to increase on higher oil production and prices.
As at February 28th, external reserves were
$42.49bn, up 4.42% ($1.8bn) compared to January’s
end period of $40.69bn. The level of gross external
reserves is 6.48% higher than January’s average of
$39.81bn and 22.20% higher than the Q4’17 aver-
age of $34.77bn. The reserves import and payment
cover is 11.80months.
Outlook
The accretion in the external reserves is expected to be sustained in March but at a slower pace as the
expectation of improved oil prices and production level is positive.
Forex Market
Exchange Rate
On February 1st the exchange rate was at N364/
$, it traded flat for 12days at N363/$ then appreci-
ated to N362/$ on February 20, before retreating
to close at N363/$. At the interbank market, the
naira also remained relatively stable trading
closely between N305.75/$ and N306.5/$. At the
Investors and Exporters Foreign Exchange Window
(IEFX), the naira depreciated marginally by 0.11%
to close the month of February at N360.41/$ from
N360.00/$ in January. Total turnover at the IEFX
window in February was $3.95bn, 34.39% lower
compared to $6.02bn in January.
Outlook
At the parallel market, we expect the naira to depreciate slightly due to increased forex demand as
manufacturers and businesses build up inventories ahead of Easter. However, growing investor
confidence, especially at the IEFX window, will continue to attract Foreign Portfolio Inflows (FPIs). This will
lead to the accretion of external reserves and boost the CBN’s ability to defend the naira
FA
CT
S &
FIG
UR
ES
8
9
17
18
Commodities market - Expor ts Oil prices
At the end of February, the average Brent price
was $65.73pb, 4.85% lower compared to Janu-
ary’s average of $69.08pb. Brent crude prices
reached a record high of $70pb in January be-
fore falling to $62.72pb in February, the lowest
level year-to-date (YTD). The decline was initially
prompted by the global equity sell off that oc-
curred from February 2nd to13th. However, the
correction in oil prices was more than the global
sell-off in the equities market. Oil prices fell on the
back of increased US crude activities (765 oil rigs),
ample global supply (10million bpd) and a drop
in demand as many refineries shut down for
maintenance. Meanwhile, Brent crude recovered
from recent losses to cross $65pb, on the back of
lower-than-expected US inventories (1.84bn bar-
rels), a weaker US dollar and a rebound in the global equities market. The Energy Information Administration
(EIA) projects a 1.4% increase in shale production in February to 6.55 million barrels per day (mbpd).
Outlook
Relatively stable oil prices offset the possibility of disruptions to the implementation of Nigeria’s 2018
budget. At $65.73pb, oil prices are 46.07% above the 2018 budget benchmark of $45pb. Revenue
windfalls are positive for Nigeria’s external position. Favorable terms of trade, trade balance and
accretion in external reserves will help support the currency in the event of a sharp decline in oil prices.
10 Source: Bloomberg, FDC Think Tank 11 Source: OPEC, FDC Think Tank
Oil Production
Nigeria’s domestic production decreased by
0.55% to 1.82mbpd in January from 1.83mbpd
in December. Oil production in Q4’17 was
1.91mbpd, 0.12mb lower than the daily aver-
age production in Q3’17.
CO
MM
OD
ITY
UP
DA
TE
10
11
19
Natural Gas
Natural Gas averaged $2.659/MMBtu in February.
This represents a 15.99% decline in prices from the
average of $3.165/MMBtu in January.
Prices fell to the lowest on February 12th at $2.552/
MMBtu amid rising US output before closing the
month at $2.667/MMBtu.
Outlook
Natural Gas prices are expected to dip in the coming month as the weather forecasts for March show
expectations of warmer temperatures. This could lead to a decline in global demand.
Cocoa
Cocoa prices strengthened during the period by 9.12% to an average of $2,118/mt in February from $1,941/
mt in January. This was due to weather concerns in West Africa.
Outlook
The bullish trend of cocoa prices is expected
to intensify in the coming month. Ghana’s
Cocobod has announced its plan to end
subsidies to farmers in a bid to save up to
$450million. This action will affect over 800,000
farmers, threatening the output of the country.
12 Source: Bloomberg, FDC Think Tank 13 Source: Bloomberg, FDC Think Tank
Outlook
OPEC and the U.S shale oil representatives held a meeting march 5th which was centered on taming a
global oil glut. The global price of oil would be influenced by the outcome of this meeting. However, we
expect Nigeria’s oil production to remain around current levels of 1.75 – 1.85mbpd in the coming month
barring any disruption to pipelines.
CO
MM
OD
ITY
UP
DA
TE
12
13
20
Commodities market - Imports
Corn
Corn prices averaged $3.70/bushel in February,
4.82% higher than the average of $3.53/bushel in
January. This is partly due to the unfavourable
weather conditions in US and Europe.
14 Source: Bloomberg, FDC Think Tank 15 Source: Bloomberg, FDC Think Tank
Sugar
Sugar prices averaged $0.1348/pound in February,
3.65% lower than the average of $0.1399/pound in the
previous month. Sugar fell to a 29-month low during
the month due to supply glut. Prices reached a high of
$0.1400/pounds and a low of $0.1287/pound.
Outlook
The price of sugar is expected to remain at
current levels on signs of lower consumer
demand. If the price stays at current levels, some
producers may be forced out of business. This will
soften supply and introduce some balance into
the market.
Wheat
Wheat prices closed the month of February at $4.95/
bushel, 9.51% higher than $4.52/bushel in January.
However, average wheat prices increased by 7.41% to
$4.64/bushel from $4.32/bushel in the corresponding
period. Wheat prices increased as dry weather across
key U.S planting regions threatens crop yields.
Outlook
Unfavourable weather conditions in Europe
coupled with strong global demand are
expected to keep prices relatively high in the
coming month.
CO
MM
OD
ITY
UP
DA
TE
14
15
21
The Nigerian stock market reversed some of its gains in
January, losing N346.09bn in February. NSE ASI lost 2.28%
to close at 43,330.54 points in February. This correction
can be attributed to profit taking activities, as the bourse
gained 15.95% in January alone. As a result, YTD return
stood at 13.30% as at the close of February. Similarly, mar-
ket capitalization declined by 2.18% to N15.55trn during
the month.
In light of market adjustment, market breadth was nega-
tive at 0.33x, as 26 stocks increased, 68 stocks remained
flat, while 78 declined; a decrease from the previous peri-
od, which came in at 3.6x. However, price to earnings (P/
E) ratio remained flat at 14.02x during the period.
Trading activities slowed marginally in February. Average
volume declined by 39.47% to 597 million units, with aver-
age turnover moving in the same direction, but at a high-
er margin, declining by 40.86% to N5.3bn.
Stocks in the financial services sub sector remained the
most liquid, maintaining dominance in trading activities
during the period, especially the tier 2 banking stocks.
Transactions in this sub sector accounted for 80.02% of
volumes traded on the bourse during the month of Febru-
ary.
The CBN issued a circular, imposing limit on banks’ divi-
dend payout. This is in line with compliance to the Basel
accords and a push to force banks to enhance their
capital buffers to mitigate systemic risks. This resulted in a
negative knee-jerk reaction, as banking stocks lost over
N100bn in 2 days in the week following the directive.
STOCK MARKET
17Source: NSE, FDC Think Tank
With the exception of the insurance index, all other sec-
tor indices closed in the red for the month of February.
The insurance index recorded a marginal gain of 0.06%
due to capital appreciation recorded by heavy weights
in the index. On the other hand, the oil and gas sector
index was the highest decliner, on the back of significant
losses by key oil players, who were unable to maintain
the gains recorded during the oil price rally in January.
In addition, financial services stocks dominated the gain-
ers’ list, as all top three gainers comprised of insurance or
banking stocks - Linkage Assurance (24.6%), Unity Bank
Plc (17.1%) and NEM Insurance (16.0%). While manufac-
turing stocks such as Beta Glass Co. (15.6%) and Unilever
Nigeria (15.1%) also recorded significant gains during the
period.
22
Profit taking activities will persist in the short-term, as investors move to capitalize on stock market gains
recorded earlier in the year. However, investors will take position in stocks with robust dividend payout
history before the closure of respective registers, in order to qualify for dividend payments.
O
U
T
L
O
O
K
The new par rule continues to weigh on the losers’ chart, as the top four losers closed the period below 50 kobo
per share. Like the gainers’ chart, insurance stocks dominated the laggards, as Consolidated Hallmark Insurance
and UNIC Diversified Holdings each lost about 48% of their value during the period. Courteville Business Solutions
(46%), Multiverse (37.5%) and Skye Bank (34%) also featured on the list.
Symbol Feb 28 '18 Price Jan 31 '18 Price Change % Change PE Ratio
LINKAGE ASSURANCE PLC 0.86 0.69 0.17 24.6% 2.9
UNITY BANK PLC 1.78 1.52 0.26 17.1% 1.48
N.E.M INSURANCE CO (NIG) PLC. 2.10 1.81 0.29 16.0% 4.91
BETA GLASS CO PLC. 72.1 62.35 9.75 15.6% 11.47
UNILEVER NIGERIA PLC. 51.2 44.5 6.70 15.1% 46.46
Top Gainers
Symbol Feb 28 '18 Price Jan 31 '18 Price Change % Change PE Ratio
CONSOLIDATED HALLMARK INSURANCE PLC 0.26 0.50 0.24- -48.0% 7.54
UNIC DIVERSIFIED HOLDINGS PLC. 0.24 0.46 0.22- -47.8% -
COURTEVILLE BUSINESS SOLUTIONS PLC 0.27 0.50 0.23- -46.0% 18.08
MULTIVERSE PLC 0.30 0.48 0.18- -37.5% -
SKYE BANK PLC 0.97 1.47 0.50- -34.0% -
Top Losers
23
24
Corporate Focus :
PZ CUSSONS PLC
Analyst
Recommendation: SELL
Market Capitalization:
N91.32bn
Recommendation
Period:
6 Months
Current Price:
N23.30
Industry:
Consumer Goods
Target Price: N17.60
Analyst’s note
The Nigerian manufacturing sector was one of the hardest hit during the reces-
sion. Even today it continues to face challenges due to increasing input costs,
tight monetary and fiscal policy, security challenges in the North-East region and
low consumer confidence, despite an improving economy. Weak macroeco-
nomic factors, such as a high inflationary environment (headline inflation at
15.13% in January 2018) and high interest rates, continue to affect the industry
negatively. During the collapse of global oil prices in 2014 and the disruption in
oil production in the Niger Delta, consumers’ purchasing power also declined.
PZ Cussons Nigeria Plc (PZ Cussons) was not isolated from the impact of these
trends as it recorded negative-bottom line earnings of N123.08mn in Q1’18
(period end Aug’17)16. However, as the economy exited a recession in Q4’17
(1.92% GDP growth), PZ Cussons recorded positive bottom-line earnings for quar-
ter ended Nov’17) and half year ended Nov’17. Despite the recession, PZ has
delivered top-line growth for five consecutive quarters. Sales in the quarter end-
ed Nov’17 were up 17.59% to N22.22bn from N18.90bn in the quarter ended
Aug’17.
Although PZ was resilient in a weak macroeconomic environment, using intrinsic
valuation and taking into consideration possible risk factors, its share price is cur-
rently overvalued. Accordingly, we place a SELL rating on PZ Cussons Nigeria Plc.
16PZ Cussons’ fiscal year is June 1 2017 – May 31, 2018. PZ Cussons’ period ends include;
Q1’18: Jun’17 – Aug’17. Q2’18: Sep’17 – Nov’17. Q3’18: Dec’17 – Feb’18. Q4’18: Mar’18 – Apr’18.
25
IMPRESSIVE H1’18 EARNINGS GROWTH DRIVEN BY STABLE FOREX
PZ Cussons posted sales of N41.12bn in half year ended Nov’17 which represents a 23.48% increase of N33.30bn com-
pared to half year ended Nov’16. The rise in sales was driven primarily by PZ’s favorable price/volume mix in its person-
al and home care categories. The company’s cost of sales increased by 31.80%, with selling and distribution costs up
4.97%, and administrative expenses up 40.80%. However, higher product price offsets the impact of rising costs on
margins.
PZ also reported strong bottom-line earnings. Profit before tax (PBT) rose by 304.90% to N868.68mn while profit after tax
(PAT) also increased by 304.03% to N288.95mn from half year ended Nov’16. This was driven by the 47.9% fall in forex
loss to N2.57bn in half year ended Nov’17 from N4.94bn in half year ended Nov’16. PZ benefited from the Investors’
and Exporters’ Foreign Exchange Window (IEFX) introduced by the Central Bank of Nigeria (CBN) in late April 2017.
Although borrowing costs remain high with net finance costs at N501.18mn, a 757% increase from N58.46mn in half
year ended Nov’17, it was not enough to offset gains.
26
Industry and Company Overview
The Nigerian manufacturing sector
was badly hit by the recession in
2016. This was due to the weakening
of the naira amid dwindling oil prices
and shortfall in oil production be-
cause of security challenges in the
Niger Delta. The unavailability of the
US dollar for the importation of raw
materials, as well as its high cost, was
a major challenge. The sector was
characterized by a fall in patronage,
production, turnover and profit mar-
gins. However, since Q2’17,17 when
Nigeria exited its worst recession in
20 years, the manufacturing sector
has continued to grow. In 2017, the
sector recorded a growth rate of -
0.21% from -4.32% in 2016. The intro-
duction of the IEFX by the CBN in
late April 2017 boosted liquidity in
the forex market. This in turn led to
the expansion of the manufacturing
sector due to access to cheaper
forex to import new technology, ma-
chinery replacements and purchase
raw materials. Also, the appreciation
of the naira against the dollar rela-
tive to 2016 helped reduce import
costs.
PZ Cussons Nigeria originated in1899
when Paterson and Zochonis
opened their first branch office in
Nigeria. The first soap factory was
incorporated in December 1948 as
PB Nicholas & Company Limited and
was later changed to Alagbon In-
dustries Limited in 1953. However, in
1960, the name was changed to
Associated Industries after which it
became listed on the Nigerian Stock
Exchange (NSE) in 1972. In 1973, PZ
entered the detergent and refrigera-
tor markets in Nigeria. PZ Cussons
created Nutricima – a joint venture
with Glanbia Plc – to supply evapo-
rated milk and milk powder to Nige-
ria in 2003 and commenced manu-
facturing in 2005. In 2007, the Nigeria
business changed its name to PZ
Cussons Nigeria Plc. In 2011, PZ Wil-
mar was established – a joint venture
with Wilmar International – to build a
palm oil refinery and food ingredi-
ents business. PZ Cussons Limited, UK
is currently the main shareholder of
73.27% of PZ Cussons Nigeria Plc
while the remaining 26.73% is held by
the general public.
Its principal activities include the
manufacturing of a wide range of
consumer products such as deter-
gent, medicaments, soap, cosmet-
ics, confectionery and home appli-
ances. These are sold and distribut-
ed throughout Nigeria through com-
pany-owned depots. PZ Cussons
operates in five main categories:
personal care, beauty, home care,
food and nutrition, and electrical.
The company remains the market
leader in the toilet soap and baby
soap segments.
Over the years, PZ Cussons has col-
laborated with strategic companies
to successfully provide products that
meet consumers’ needs. PZ Cussons
remains the leading personal and
household company in Nigeria. Ni-
geria remains PZ’s largest market in
Africa. Table 1 shows PZ’s business
segments and its unique brands.
17Refers to normal calendar period. Q2’17: Apr’17 – Jun’17
27
TABLE 1: PZ CUSSONS BUSINESS SEGMENTS AND BRANDS
At its core, PZ Cussons Plc’s rivals are Nestlé, Cadbury, GlaxoSmithKline (GSK) and Unilever. However, the company’s
marketing strategy and its 25 strategically located depots and distribution channels across Nigeria have helped it
maintain market share. Nestlé Nigeria Plc is the largest in the food and nutrition segment with bottom-line earnings
of over N22.3bn. However, in the personal and home care category, PZ Cussons remains the largest player.
The picture below gives a breakdown of leading players in terms of Earnings per Share (EPS) and market capitaliza-
tion.
FIGURE 2: LEADING PLAYERS IN CONSUMER GOODS SECTOR
Business Segment Brands
Home Care Elephant, Zip, Morning Fresh, Jet, Tempo, Rex
Soaps Medicaments Hair Care Baby Care Skin Care Perfumes Household Appliances Consumer Electronics Electrical retail Nutrition Palm Oil
Premier, Imperial Leather, Joy, Duck, Canoe, Drum Robb, Heatol, Super Robb, Medicated Dusting Powder Venus, Joy Nigerian Baby Care, Cussons Baby Range Venus, Stella Pomade, Joy, Carex Dan Duala, Venus Gold, Joy Cologne Haier Thermocool Haier Thermocool Cool World Coast, Yo!, Nunu, Olympic Milk, Olympic Apple Drink Mamador, Devon Kings Refined Palm Olein
The company’s growth can be seen through increases of its total assets and revenue during the years.
28
29
MANAGEMENT
The ability of PZ Cussons’ management to sustain returns and drive growth in a peri-
od of weak economic growth can be attributed to its diversified business segments
and extensive distribution network across the country.
To further drive growth and improve earnings, management intends to develop
innovative leading brands and improve its products to meet the needs and tastes
of its customers. The company will review its product portfolio to keep the right fo-
cus on its key brands and channels. Management plans to sustain its investments in
supply chain processes and consolidate its depot networks to optimize operational
efficiencies.
Furthermore, PZ is a part of a global organization benefiting from global innovations
and initiatives of its group. As a result, management has integrated its supply chain
processes and sales functions as a single structure across the globe and region. This
will align the company’s route to market leading to further value.
Its management team has a wide range of experience in finance, managerial roles
and government. Mr. Christos Giannopoulos, CEO, who joined the group in July
1988 and the Nigerian subsidiary in 2002, has steered the company for the last nine
years. He has served in several managerial roles in the UK, Australia, Kenya and In-
donesia. He has a BSc in Business Administration from the University of Derby, UK.
Chief Dr. Kolawole B. Jamodu has served as the Non-Executive Chairman of the
Board of Directors, since 2014. He joined the group in 1974 and served in an execu-
tive position for 24 years, rising to CEO until he retired in 1999. He continued as the
Chairman until 2001 when he joined the Federal Executive Council as the Minister
of Industry. He is currently on the Board of Nigerian Breweries Plc as its Chairman
and he has led organizations such as Universal Trust Bank Plc, Manufacturers’ Asso-
ciation of Nigeria (MAN), and United Bank for Africa Plc. He has also served as part
of the National Economic Management team under former president, Goodluck
Jonathan.
The company’s board and executive management team understand the local
business environment. They bring a wealth of experience that has helped propel
the company to past successes.
Chief Executive Officer
Mr. Christos Giannopoulos
Capable of capitalizing on potential growth opportunities in the consumer goods industry
Non-Executive Chairman of
the Board of Directors
Dr. Kolawole B. Jamodu
30
The Bull and the Bear Says:
Leading personal and household company in
Nigeria
Rich product portfolio for personal care, home
care, food and nutrition
Superior and recognizable brand value
Strong parent company
Effective marketing and distribution channels
cut across the country
Proposed upward review of minimum wage
could bolster consumer spending
Qualified, talented and experienced manage-
ment team
Diversified and resilient revenue
Intense competition from other leading players
such as Unilever, Nestlé and Cadbury
Rising raw material and input costs could threat-
en earnings growth
Persistent forex challenges could put pressure on
earnings
Persistent macroeconomic headwinds have
dampened consumer demand
Insurgency activities in Nigeria could inhibit sales
The major risks that could prevent PZ Cussons from
achieving its goals of boosting earnings, increasing
sales and managing costs include persistent
macroeconomic challenges, credit risk, liquidity risk,
market risk (currency and interest rate), and capital
risk amid security challenges in the country.
PZ Cussons’ financials could be affected by
commodity price fluctuations, particularly for raw
materials such as crude palm oil tallow, sodium lauryl
ether sulfate, and linear alkylbenzene. The company is
also exposed to currency risks on foreign
denominated borrowings from PZ Cussons' Treasury
Centre - Middle East & Africa Limited. Exposure,
though insignificant, could reduce profit accruable to
equity holders in terms of high finance costs.
Nevertheless, given the macroeconomic conditions,
interest rate hikes are unlikely due to an already
tightened monetary policy. Also, due to a slow and
tepid economic recovery, an accommodative
stance is necessary to stimulate growth.
Finally, the security issues have persisted in the North-
East region, disrupting major economic activities,
which restrict geographical distribution and sale of PZ
Cussons’ products. The presence of an experienced
management team has consistently managed the
macroeconomic challenges and in the foreseeable
future will be called to effect innovation, exploit
success and continuously improve productivity in
navigating a turbulent period.
The risks facing PZ Cussons could limit management’s
ability to drive growth and sustain returns. Even
though the management has put structures in place
to ensure sales growth and cost efficiency, the
macroeconomic headwinds facing the company
may be beyond the control of its competent
leadership.
Risk and Outlook
Weak macroeconomic fundamentals pressure growth potential
31
Our valuation
We derived our valuation for PZ Cussons Plc by using the Discounted Cash Flow (DCF) methodology. Our fair value
estimate for PZ Cussons stood at N17.60, which is a 24.46% downside on its current share price of N23.30 as at March
05, 2018. The discount rate [weighted average cost of capital (WACC)] of 19.8% is derived using a 16.2% risk free rate,
a beta of 0.7964, and a market risk premium of 6.4%. The calculated long-term cash flow growth rate to perpetuity is
4%.
Important Notice
This document is issued by Financial Derivatives Company. It is for information purposes only. It does not constitute any offer, recommendation
or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any predic-
tion of likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illus-
tration. All rates and figures appearing are for illustrative purposes. You are advised to make your own independent judgment with respect to
any matter contained herein.
© 2018. “This publication is for private circulation only. Any other use or publication without the prior express consent of Financial Derivatives
Company Limited is prohibited.”